CHAPTER 1: TEST BANK

SOME ANSWERS AND COMMENTS ON THE TEXT DISCUSSION QUESTIONS

1. Use the production possibilities curve to show that increased resources allocated to
national defense entail decreased amounts of other goods and services.
2. Unemployment implies that we produce less output than we could. Therefore,
unemployment implies a lower standard of living for society. While GD per capita is
not necessarily an accurate measure of a country!s standard of living, which depends on
the composition and distribution of national output as well as its magnitude, producing
less than we could surely will not raise our standard of living.
". #y using our resources and technology to their fullest we increase our production
and usually raise our average standard of living. Types of output are also important.
$or e%ample, if we produce capital goods, they go into our resource supply and cause
greater economic growth in the future. &n the other hand, if we produce consumer
goods, they do not augment resource supplies and lead to greater future growth. 'f we
produce military goods instead of public health goods, the average standard of living
may be adversely affected. (ess developed countries face agoni)ing choices when
deciding between current and future consumption, and between types of current
consumption. Distribution of output usually depends on distribution of income
*generated from the production of output+. ,ertainly this distribution of income and
output has a ma-or impact on the wellbeing of the people of the country.
.. Tal/ about a value0laden 1uestion2 We might discuss both need and contribution to
production here. 3nd, we need not be absolute. We may desire a system of distribution
that ensures basic needs satisfaction for everyone, and beyond this, distribution depends
on income.
4. 5o. 6upply and demand in the mar/et do that.
7. 5o. #ut it does not necessarily mean that the economy is less e1uitable than some
others either.
8. 917, 7::; 6upply has decreased, 91<, .::
SUGGESTED TEST QUESTIONS
=ultiple0,hoice >uestions
1. The law of demand says that?
a. price and 1uantity demanded are directly related.
b. price and quantity demanded are inversely related.
c. price and 1uantity supplied are directly related.
d. price and 1uantity supplied are inversely related.
2. $ill in the blan/s to complete the following statement. rice and 1uantity demanded are
@@@@@ related, and price and 1uantity supplied are @@@@@ related.
a. inversely, directly.
b. directly, inversely.
c. inversely, not.
d. not, inversely.
". &pportunity cost refers to?
a. the dollars spent on a product.
b. the best of the alternatives foregone in order to produce or consume
something.
c. the resources used to ma/e something.
d. the money spent by a business to produce something.
The ne%t three 1uestions refer to the following graph.
.. A1uilibrium price and 1uantity are?
a. 9., 12: b. $3, 120 c. 9., 14: d. 92, 14:
4. 3t 92, there would be a @@@@@ in this mar/et.
a. surplus of 7:.
b. surplus of ":.
c. shortage of 60.
d. shortage of ":.
7. 3t what price would there be a surplus of 7:B
a. 92 b. 9" c. $4 d. cannot say from this data.
The ne%t three 1uestions refer to the following production possibilities curve for medical
care and education.
8. 'f the economy is at point $, it represents?
a. unemployment andor inefficiency.
b. overemployment.
c. an impossible point to reach with available resources.
d. an optimum use of society!s resources.
<. oint G represents?
a. unemployment andCor inefficiency.
b. overemployment.
c. an impossible point to reach !ith available resources.
d. an optimum use of society!s resources.
D. 'f the economy is at point D, the opportunity cost of 1: additional units of education will
be?
a. 2: units of medical care.
b. 30 units of medical care.
c. 9":,:::.
d. 9D:,:::.
1:. When the demand curve shifts to the right, we say that?
a. price has decreased.
b. e1uilibrium 1uantity has decreased.
c. demand has decreased.
d. demand has increased.
11. When demand increases?
a. e1uilibrium price will increase, but e1uilibrium 1uantity will decrease.
b. e1uilibrium price will decrease, but e1uilibrium 1uantity will increase.
c. both e1uilibrium price and 1uantity will decrease.
d. both equilibrium price and quantity !ill increase.
12. When supply increases?
a. e1uilibrium price will increase, but e1uilibrium 1uantity will decrease.
b. equilibrium price !ill decrease, but equilibrium quantity !ill increase.
c. both e1uilibrium price and 1uantity will decrease.
d. both e1uilibrium price and 1uantity will increase.
1". olice protection and national defense are e%amples of?
a. complementary goods.
b. public goods.
c. substitute goods.
d. inferior goods.
1.. =ar/et failures are defined as?
a. failures to ration away shortages or surpluses.
b. circumstances in !hich the mar"et does not result in an optimum outcome.
c. failure to meet the basic needs of some groups.
d. poverty and unemployment.
14. When we say Eall other things e1ualF with regard to demand and supply, we mean that?
a. only one curve at a time can shift.
b. factors other than price that could affect quantity demanded or supplied do
not change.
c. the mar/et is at e1uilibrium.
d. there is neither a surplus nor a shortage in the mar/et.
17. ublic goods and services are unli/ely to be provided by the mar/etplace because?
a. they cannot be divided into small segments and offered for sale.
b. they are sub-ect to the Efree riderF problem.
c. it is difficult to e%clude non0paying customers from their benefits.
d. #ll of the above
The following two 1uestions refer to the production possibilities schedule below?
=edical
3lternative ,are Aducation
3 1.: :
# 12: 1:
, D: 2:
D 4: ":
A : .:
18. What is the opportunity cost of the first 1: units of educationB
a. 92::,:::.
b. 20 units of medical care.
c. 4: units of medical care.
d. We cannot say because we do not /now the price of either education or medical
care.
1<. The essential point this production possibilities schedule is that?
a. !ith our limited resources, !e cannot have unlimited amounts of both
education and medical care.
b. we should provide our citi)ens with free public education and free medical
care.
c. we could provide our society free public education, but free medical care
would e%haust our resources too rapidly.
d. we do not really have to ma/e a choice between education and medical care,
because we have plenty of resources to provide enough of both.
1D. Which of the following is not a mar/et failureB
a. spillovers
b. mar/et power
c. public goods and services
d. technology change
2:. The ability to influence the mar/et price of a product is?
a. competitive pricing
b. microeconomic pricing
c. mar"et po!er
d. economic power
21. Which of the following is a microeconomic topicB
a. total income
b. total output
c. distribution of income
d. gross domestic product
22. The term Gpublic!, as used in this course, refers to?
a. consumers
b. businesses
c. wor/ers
d. government
2". Avery point on the production possibilities curve displays?
a. opportunity costs
b. full employment
c. the current time period
d. all of the above
2.. Which of the following is not a private goodB
a. a house
b. a school
c. a factory
d. a restaurant
24. Which of the following can cause in outward shift in the production possibilities
curveB
a. an increase in the 1uantity of resources
b. an improvement in the 1uality of resources
c. an improvement in technology
d. all of the above
True0and0$alse >uestions
$ 1. rice and 1uantity demanded are directly related.
T 2. rice and 1uantity supplied are directly related.
$ ". A1uilibrium price will go up if supply increases.
T .. 3 shift of the supply curve to the right is an increase in supply.
T 4. 6ociety can reach a point beyond its current production possibilities curve if
economic growth occurs.
T 7. 3ny point on the production possibilities curve represents full employment and
efficiency.
$ 8. roduction possibilities curves never shift outwards.
T <. Aconomic growth shifts out the production possibilities curve.
T D. ublic goods are generally provided by the government.
T 1:. 6pillover costs or benefits are e%amples of mar/et failures.
T 11. 6carcity means that we have limited resources relative to our unlimited wants.
$ 12. =ost economists believe that the government should not become involved in
the case of a mar/et failure.
T 1". 3n e%cise ta% on cigarettes will cause an increase in the price of cigarettes.
T 1.. &pportunity cost is defined as the best alternative foregone.
$ 14. Unless e%ternalities are present, the competitive mar/et place is generally
considered to be e1uitable.
6hort03nswer >uestions
1. ,onsider the mar/et for beef below. 3ssuming that consumers either eat beef or other
meats, draw the shift that would occur in the beef mar/et if the price of chic/en went
down. What will be the effect on the e1uilibrium priceB @@@@@@@@@@@@@@@ What will
be the effect on the 1uantity of beef that is bought and soldB @@@@@@@@@@@@@@@
2. Draw the shift that will occur in the mar/et for corn below if farmers in the =idwest
have unusually good weather this year. What will be the effect on mar/et priceB
@@@@@@@@@@@@@@@ What will be the effect on the amount of corn that is bought and
soldB @@@@@@@@@@@@@@@
". Draw the shift that will occur in the mar/et for steel below if rising energy prices
increase the cost of producing steel. What will be the effect on the mar/et price of
steelB @@@@@@@@@@@@@@@ What will be the effect on the e1uilibrium 1uantity bought
and soldB @@@@@@@@@@@@@@@
.. The mar/et for Geritol *a supplement used by elderly people+ is shown below. Draw
the shift that will occur as the si)e of the elderly population increases. What will be
the effect on the mar/et price of GeritolB @@@@@@@@@@@@@@@ What will be the effect
on the e1uilibrium 1uantity bought and soldB @@@@@@@@@@@@@@@
4. Draw the shift that will occur in the mil/ industry if technological progress ma/es it
cheaper and easier to produce mil/. What will be the effect on the mar/et price of mil/B
@@@@@@@@@@@@ What will be the effect on the e1uilibrium 1uantity bought and soldB
@@@@@@@@@@@
7. ,onsider the production possibilities curve below. Which point on the graph shows?
a. unemployment of resources? @@@@
b. a level of output unachievable in the current time period, but possible with
economic growth? @@@@
c. a level of output showing increased capital goods and an opportunity cost of
fewer consumer goods? @@@@
8. Using the same graph as H7 above, draw the shift that will occur over time as a result of
economic growth made possible by the e%pansion of capital goods production in the
initial time period.